Valiantly Blogging on a Number of Matters of the Utmost Importance, for the Benefit of All!

Monday, August 20, 2012

The incredible credibility of a failed plan

One of the biggest arguments in economic
policy is finally over.

The government says that it mustn’t change
course on fiscal policy, because of the danger of losing market confidence and
having to pay high rates for its borrowing. Opponents say that these low rates
mean that we can afford to borrow more without spooking the markets, and give
the stagnant economy a bit of a boost.

“Ah, but Britain is a safe haven”, the detractors
cry. “Government borrowing costs are low, so we can afford to spend more.”Where does one start when faced with such nonsense? The UK government can
currently borrow cheaply, partly because –when compared with much of the
eurozone – we have a reasonably credible fiscal plan. We aren’t sticking to it,
of course.

We aren’t sticking to it. This is like saying
that the police can trust a witness’s statement because they’ve got a
sophisticated new lie detector – although they didn’t use it, of course.

And Halligan’s right that the government’s
plan has come unstuck. They’re now facing the prospect of borrowing £200
billion more than planned over five years:

This is not because they’ve got cold feet on
the cuts; it’s because the economy is due to grow by less than half the rate
they expected:

No doubt there is a point where the markets
would take fright at the amount of government borrowing. But £200 billion extra
doesn’t seem to have taken us significantly nearer it. This follows the pattern
of late 2008, when an even vaster surge in government borrowing was accompanied
by a fall – not a rise – in the rate charged on that borrowing. A major
developed economy with control of its own currency, and with relatively low
inflation, has to go horrifically wrong before there’s any real risk of a government
debt default. We’ve not been anywhere near that point and there’s no sign that we
will.